Terminating commercial contracts
We help businesses achieve their goals. Sometimes that means ending or renegotiating contracts that are no longer practical or commercially beneficial. It also means resolving disputes and obtaining injunctions regarding performance and payment when things have gone wrong.
We are often asked to review commercial contracts that are either no longer providing value to our client or have caused a dispute between business partners.
In recent months we have helped our clients:
- Renegotiate a contract with a view to varying its terms to make them more commercial for our client;
- Successfully defend a notice to terminate from another party based on a claim for failure to remedy a breach; and
- Preserve their goods and the value in their brand reputation, whilst minimising their losses after their customer business went insolvent;
We aim to put our clients on solid ground and avoid hidden traps – more on these below.
What is contract termination – a common misconception
It may seem obvious but it is worth clarifying because the legal jargon means different things and will affect the options available to your business.
“Termination” means the contract is discharged. In other words, all future, unaccumulated obligations owed by both parties fall away and cease to be owed. More importantly, the contract does not cease to exist. Prior obligations are still owed. However, the obligations to perform shift to obligations to pay damages for the loss arising from their breach of contract. The result of terminating a contract is that the parties will be put into an end position as if the contract had been performed properly according to its terms.
“Rescission” is where the contract is voidable. For the purposes of obligations and liabilities owed under the contract rescission means that the contract is treated as never having existed. The result of rescinding a contract is that the contract will be nullified. Furthermore, the parties will be put back into the position they were in before the contract was entered into.
Hot topics and hidden traps to avoid
There are some increasingly common traps that are developing in the commercial world. To help you avoid them we have set out below some recent scenarios that have found their way to court and our tips for how to minimise the risk to your business.
Side letters – more uncertain than efficient
In the recent case Maurice MacNeill Iona Ltd (t/a Century 21 UK) v C21 London Estates Ltd  EWCA Civ 1823 the Court of Appeal looked at the enforceability of terms in a side letter to franchising contract.
A franchisor of an estate agency brand and the franchisee agreed to a side letter including terms to the contact. The terms had the effect that the franchisee agreed to pay outstanding fees due in respect of the franchise contract. The franchisee wanted to enter into a second franchise agreement for a second part of the franchise. The franchisor proceeded assuming that the terms in the side letter to the first contract were conditions of the second franchising contract. When the relationship broke down it argued that non-payment of fees under the first franchise contract was grounds for termination of the second agreement.
Based on the contractual relationship and circumstances between the parties the main questions asked were;
- Was it implied that the side letter’s terms formed part of the second contract?
- If the terms did apply to the second contract, was there a right to terminate the entire agreement for breach of terms contained in this side letter?
What was held
The Court of Appeal held the issue to be a matter of contractual interpretation. Since the second agreement was a written contract with an ‘entire agreement’ clause it had to be viewed as containing a complete set of contractual terms. It should therefore be construed without regard to the parties’ subjective intentions or other documents. In these circumstances the terms of the side letter were not part of the contract.
As a matter of law a guarantee contained in a side letter can be a condition of making a contract. However, it did not follow on these facts. If incorporated into the contract, any breach of the guarantee terms contained in the side letter would terminate the contract as a whole. The failure to pay punctually was a curable default under the terms of the agreement. So it did not give the right to terminate the entire franchise agreement.
The Court of Appeal maintained the best way to incorporate terms as contractual obligations was to express them in the contract.
This case serves as a warning for many businesses that choose to negotiate extra terms in a side letter. It may often be easier and more efficient to negotiate ‘extra-contractual’ terms as the commercial relationship develops. However caution should be your number one consideration. If there is a problem in the future between the parties this case shows you may find the court unwilling to uphold any ‘extra’ provisions in your side letter.
Fiduciary duties – more than contractual obligations but not enough to terminate
In Crocs Europe BV v Anderson (t/a Spectrum AGencies (A Partnership))  EWCA Civ 1400 the Court of Appeal considered termination.
The defendant was engaged by the appellant as its agent. As an agent it owed certain statutory fiduciary duties. The appellant claimed that a website where the defendant’s employees posted derogatory comments about the appellant company’s products disparaged the products which it had appointed the defendant to sell. It argued this was a breach of the terms of the agency contract which was sufficiently serious to terminate the entire agreement.
The questions considered by the court;
- Did the terms of the agency contract place fiduciary duties (above normal contractual obligations) on the defendant agent?
- Was breach of these duties a sufficient reason to terminate the agency contract?
What was held
The Court of Appeal held that the agency contract did no more than set out the relevant contractual (not fiduciary) obligations of the agent. If the contract had contained fiduciary obligations, the general principles of fiduciary law did not support an automatic termination of the contract for breach of fiduciary duties.
Breaches of fiduciary duty are capable of other consequences and remedies. This depends on the nature of the duty, circumstances of the breach and the parties’ intentions regarding the contractual terms.
Whilst this may blur the lines on fiduciary duties and muddy the waters in terms of contractual termination provisions, it is a clear warning from the court to contracting businesses not to be too hasty in deciding when to terminate for breach of fiduciary duties. Careful drafting of key contractual provisions to anticipate such breaches will provide greater peace of mind for business owners.
They key point from this case remains. If there has been a breach of duty under the contract, will terminating the entire agreement be considered a proportionate and appropriate response? Or is there another remedy available?
Practical tips for software licences
Particularly relevant for businesses operating via a platform, almost every successful business has some form of software licence [link to technology licences] but do you know what it actually says:
- Are you paying just for the licence or for maintenance and technical support as well?
- If so, what is the extent of this support?
- Is your licence time-limited or perpetual?
Renewal or extension
Automatic renewals are often subject to limitations or pre-conditions, such as timely renewal and prompt payment of fees. Failure to observe these terms is often used by software providers to terminate contracts or charge penalty costs.
Alternatively, many businesses prefer the flexibility afforded by a renewal policy that requires agreement from both the vendor and the customer. But this provides no certainty that you will be able to achieve the same or better commercial terms.
Software licence agreements commonly contain either a right to terminate for convenience or to terminate for cause.
‘Termination for convenience’ allows a party to terminate for their sole convenience. For example as soon as it is no longer commercially viable.
‘Termination for cause’ allows a party to terminate only if the other party breaches the terms of the licence agreement. Even a licence agreement that appears to be perpetual can usually be terminated in specified circumstances.
If your contract contains termination rights of either kind, you should ensure you follow the terms of the licence agreement. There may be prescribed methods of serving valid notice of termination or the rights may only apply to parts of the agreement. Failure to adhere to such terms correctly may result in you being the party in breach of the agreement.
Our team have many years’ experience of both contentious and non-contentious contractual issues in a range of industries. If you are unsure about what to do, we would be happy to review your contract and set out the next steps to achieve your commercial objectives.